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Additional Ways I Can Sell or Allocate Ownership of My Company Without Registering Stock, LLC or Other Interests: Discussion of Common Exemptions Roundup (Post 3)

On Behalf of | Feb 23, 2016 | Raising Capital, Securities Laws, Uncategorized

Employee Equity Compensation Under Rule 701.

Rule 701 allows companies to offer securities to their employees and certain other persons without the need to file a registration statement.  Specifically, non-reporting or private companies may offer and sell securities under a written compensatory benefit plan or contract for their employees, directors, general partners, trustees, and officers, as well as consultants and advisors who are natural persons and provide bona fide services outside of a capital-raising transaction.[1]  A “compensatory benefit plan” is defined as “any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension, or similar plan.”[2]  The SEC’s policy consideration behind adopting this rule was that it would be an unreasonable burden to require private companies, many of which are small businesses, to incur the expenses and disclosure obligations of public companies when they offer securities to their employees for compensatory, rather than capital-raising, purposes.[3]  Needless to say, this is a particularly useful exemption for startups and early stage businesses that want to reward and retain valuable employees and other eligible persons by offering equity incentives without resorting to other methods to compensate them, such as borrowing money.

A company relying on Rule 701 may offer any amount of securities, but the aggregate amount sold during any 12-month period must not exceed $1,000,000, 15% of the total assets of the issuer, or 15% of the outstanding amount of the class of securities being offered and sold, whichever is the greatest.[4]  The required disclosures consist of a copy of the compensatory benefit plan or the contract; if the aggregate offering amount during any consecutive 12-month period exceeds $5 million, however, the issuer must provide additional disclosures, such as a copy of the summary plan description, risk factors, and financial statements.[5]

One nice thing about Rule 701 is that, unlike other exempt offerings where an offer or sale to even one ineligible purchaser would invalidate the issuer’s reliance on the exemption, the participation of persons other than those listed above would not render the compensatory plan itself ineligible for the Rule 701 exemption; instead, offers and sales of securities to non-listed persons must be made pursuant to either registration or an applicable exemption.  Rule 701 securities are “restricted securities” and cannot be resold without either registration or an applicable exemption, unless the issuer becomes a reporting company.[6]  The issuer, of course, must also comply with any applicable state laws relating to the offer and sale of securities.

This post was a part of a multi-post blog series on other exemptions.  You can find the other posts by searching our blogs at  If you have any questions about the content of this blog series or other issues not discussed here, please contact us.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064, [email protected], or

[1] 17 C.F.R. § 230.701(c).

[2] Id. § 230.701(c)(2).

[3] 64 Fed. Reg. 11095, 11095 (Mar. 8, 1999); SEC, Release No. 33-7645: Rule 701 – Exempt Offerings Pursuant to Compensatory Arrangements (Feb. 25, 1999).

[4] 17 C.F.R. § 230.701(d).

[5] Id. § 230.701(e).

[6] Id. § 230.701(f).